UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

General Certificate of Education

Advanced Subsidiary Level and Advanced Level

9708/11

ECONOMICS
Paper 1 Multiple Choice (Core)

October/November 2012
1 hour

Additional Materials:

*1831422580*

Multiple Choice Answer Sheet

Soft clean eraser
Soft pencil (type B or HB is recommended)

READ THESE INSTRUCTIONS FIRST

Write in soft pencil.
Do not use staples, paper clips, highlighters, glue or correction fluid.
Write your name, Centre number and candidate number on the Answer Sheet in the spaces provided
unless this has been done for you.
There are thirty questions on this paper. Answer all questions. For each question there are four possible
answers A, B, C and D.
Choose the one you consider correct and record your choice in soft pencil on the separate Answer Sheet.
Read the instructions on the Answer Sheet very carefully.
Each correct answer will score one mark. A mark will not be deducted for a wrong answer.
Any rough working should be done in this booklet.

This document consists of 12 printed pages.

IB12 11_9708_11/4RP
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1

Which type of firm is able to exploit division of labour to the greatest extent?
A

a bakery employing two workers making a range of bread and cakes

a motorcycle assembler employing two hundred workers making a standardised model

a tailor employing ten workers making mens suits to order

a well established furniture maker employing three hundred workers making high quality
individual items

The diagram shows the production possibility frontier of a desert island economy where the
inhabitants live off just two commodities, coconuts and fish.

coconuts

fish

What explains the shape of the production possibility frontier?

Coconuts and fish are perfect complements.

Coconuts and fish are perfect substitutes.

Fishing and coconut growing are equally efficient.

The opportunity cost of fish increases as more time is devoted to fishing.

India is failing to reach its full economic potential because of poor rail, road and electricity
infrastructure. Its problem is not lack of government spending but a lack of skilled civil engineers.
Which factors of production need to be increased?
A

capital and land

enterprise and labour

labour and capital

land and enterprise

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4

There is a worldwide shortage of oil. The diagram shows the consumption and production of oil
(billion tonnes) in 2007 for selected countries.

United
States
consumption
Japan

production

Russia
Britain
0

0.2

0.4

0.6

0.8

1.0

bn tonnes
What can be concluded from the diagram?

In Britain, oil has zero opportunity cost.

In Japan, there is self sufficiency in oil.

In Russia, the problem of oil shortage has been solved.

In the United States, rationing will be the only solution to oil shortage.

What will happen to an industrys supply curve if new firms enter the industry?
A

It will shift to the left at any given price.

It will shift to the right at any given price.

There will be a downward movement along the supply curve.

There will be an upward movement along the supply curve.

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6

The number of passenger journeys per week by train on a certain route is shown by the demand
curve in the diagram.

fare W

U
demand

number of journeys / week

Initially the fare is OP, but it is then reduced by PW.

Which area measures the amount spent on the extra journeys resulting from the lower fare?
A
7

VUT

PWTV

VRST

URST

The diagrams show possible relationships between income and the quantity of a good
purchased.
Which diagram shows an inferior good?

B
45

income

income

quantity
purchased

income

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8

The price elasticity of demand for good X is 1. At a price of $12, quantity demanded is 4000 units.
What will be the price when the quantity demanded is 20 000 units?
A

$2.00

$2.40

$12.00

$20.00

Consumer spending decreased in the recession of 2009-10. A firm tried to keep revenue high by
giving discounts to encourage demand. It measured the price elasticity of demand (PED) for its
own product and the cross elasticity of demand (XED) with its competitors products.
When might such promotions achieve the result the company hoped?
A

when PED is greater than one and XED is positive

when PED is less than one and XED is negative

when PED is less than one and XED is positive

when PED is unity and XED is negative

10 Which combination of price and quantity will lead to a rise in price and a contraction in quantity to
reach equilibrium?

S
P1

P2
price
P3
D

Q2

Q1

Q3

quantity
A

P1Q1

P1Q3

P3Q1

P3Q3

11 In a market economy, demand for a product rises and price increases but output remains
unchanged.
What could explain this?
A

a lack of financial incentives for entrepreneurs

a perfectly inelastic supply of factors of production

consumer influence exceeding producer influence

social benefits equalling private benefits

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12 What must be the effect on consumer surplus if the supply of a product, that has a normal
demand curve, halves?
A

Consumer surplus will fall.

Consumer surplus will fall by 50 %.

Consumer surplus will rise.

Consumer surplus will rise by 100 %.

13 The diagram shows a market subject to a maximum price.

S

price

P
maximum price
D
O

Q1

Q2

quantity

What will happen if the maximum price is removed?

A

There will be allocation by a queuing system.

There will be allocation by government rationing.

There will be allocation by sellers preference.

There will be allocation by the price system.

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14 In the diagram, Q1 is the quantity produced of a good as the result of market forces.

S2 (social cost)

S1 (private cost)

price

D
O

Q1
quantity

What concept is present at output Q1?

A

a government subsidy

a negative externality

a positive externality

price instability

15 A government carries out a cost-benefit analysis to determine whether to build a new airport.
In which circumstance will it proceed with the project?
A

when external benefit exceeds external cost

when private benefit exceeds private cost

when there is a net private benefit

when there is a net social benefit

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16 An international oil company announced that it would stop exploring for oil off the coast of
Namibia. This was because there was only enough oil to support a local power station for
Namibia and not enough to allow exports of oil.
What might be a possible advantage and disadvantage to Namibia of this decision?
advantage

disadvantage

a reduction in potential external

costs of pollution

the loss of cheaper oil

a reduction in taxes paid by the oil

company to the Namibian government

the conservation of a natural resource

a saving in costly research paid for by

the oil company

a loss of employment opportunities

the exhaustion of a natural resource

the loss of potential exports

17 A government wishes to encourage the consumption of a merit good and reduce the consumption
of a demerit good.
Which policy should it adopt towards each good?
merit good

demerit good

confine access to certain age groups

tax output

increase advertising on the benefits of

the good

set a minimum level of output

subsidise the good

put legal controls on output

tax the good

produce only in the public sector

18 A government aims to stabilise the incomes received by farmers. To achieve this it uses a policy
of buying and selling farm products on the free market.
When will it not need to respond to changes in the supply of farm products?
A

when elasticity of supply of farm products is zero

when farmers produce record harvests

when price elasticity of demand for farm products is unitary

when weather conditions can be accurately predicted

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19 The table shows the levels of output which three countries can produce.
country X

25 tonnes of maize or 5 tractors

country Y

75 tonnes of maize or 15 tractors

country Z

225 tonnes of maize or 45 tractors

What would be the most likely outcome?

A

Country X will specialise in maize and country Y in tractors.

Country Y will specialise in maize and country Z in tractors.

Country Z will specialise in both maize and tractors.

There will be no gains from trade between the countries.

20 An economy with a long history of extensive barriers to trade decides to switch to totally free
trade.
What is most likely to increase in the short term?
A

consumer surplus

government revenue

inflationary pressure

profits of all domestic companies

21 Russia is a significant exporter of wheat. In 2010 there was a poor harvest and the Russian
government stopped all exports of wheat to ensure enough supplies for domestic use.
Which statement about Russias policy is correct?
A

It is an embargo and will worsen Russias balance of trade.

It is a market approach to resource allocation to prevent price rises in Russia.

It is a quota and will improve the importing countrys balance of payments.

It is a tariff and will increase the price of wheat.

22 Which is the only combination of price changes that must result in a deterioration in the countrys
terms of trade?
average price
of exports

average price
of imports

falls

falls

falls

rises

rises

falls

rises

rises

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23 The table shows the number of workers and the annual output of an industry.
year 1

year 2

year 3

120

130

100

12.00

14.30

13.00

workers in 000s
output in $m
Which statement is correct?
A

Labour productivity increases in year 2 and in year 3.

Labour productivity increases in year 2 and then declines in year 3.

Labour productivity is at its highest in year 1.

Labour productivity is at its lowest in year 3.

24 Which statement about a rise in the general price level in a country is correct?
A

It is likely to create economic winners and losers in the country.

It is unacceptable to modern governments.

It means that no goods have fallen in price.

It must make the average citizen poorer.

25 The table shows detail of the nominal interest rate and the inflation rate for selected countries in
July 2010.
country

nominal
interest rate

China

2.5

2.9

India

5.7

13.9

Indonesia

7.0

5.0

Japan

0.2

1.1

Pakistan

12.3

12.7

inflation rate

What can be concluded from this information?

A

The cost of living was higher in India than in China.

The money rate of interest was higher in Indonesia than in Pakistan.

The real rate of interest was positive in Japan but negative in Pakistan.

The standard of living was higher in Indonesia than in India.

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26 Two industries in a country are fishing and tourism. The international exchange rate of the
countrys currency fell in 2010.
If there were no other changes, how was the country affected?
A

Local people bought more imported goods because they were cheaper.

The price of fish sold in foreign markets became cheaper.

The volume of exports decreased.

Tourists to the country were discouraged by higher prices.

27 The diagram shows Australias exports to and imports from four trade partners in $billion in 1994
and 2004.

Australias exports and imports, $bn, 1994 and 2004

30

imports

25

1994

20

2004

15

exports
1994

10

2004

5
0
Japan

United States

China

New Zealand

With which country did Australia have a trade deficit in 1994 and a trade surplus in 2004?
A

Japan

United States

China

New Zealand

28 Country X trades with only two countries, Nigeria and Malaysia.

80 % of the countrys trade is with Nigeria and 20 % is with Malaysia.
The original value of the trade-weighted exchange rate index is 100.
The value of the country Xs currency against the Nigerian Naira rises by 10 %. The value of the
country Xs currency against the Malaysian Ringgit rises by 50 %.
What will be the value of country Xs new trade-weighted exchange rate index?
A

115

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29 In the diagram, curves D1D1 and SS relate to the demand for and supply of sterling in the
foreign exchange market.
S

D1
D2

price of
sterling
in $US

D1

S
D2
O

quantity of sterling

What may cause the demand curve to shift from D1D1 to D2D2?
A

an increase in UK interest rates

an increase in the price of US goods sold in the UK

the removal of UK tariffs against US goods

the development of US substitutes for UK goods

30 What is an example of an expenditure-dampening policy?

A

an increase in income tax rates

an increase in the level of import tariffs

an upward revaluation of the exchange rate

the introduction of import quotas

Copyright Acknowledgements:
Question 4
Question 27

Raising the Stakes; The Economist; 11 April 2009.

A Survey of Australia; The Economist; 7 May 2005.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every
reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the
publisher will be pleased to make amends at the earliest possible opportunity.
University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of
Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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